Thursday, January 11, 2018

Waiver of Arbitration by Litigation Conduct

By Julia Pendery

Never mind that lawsuit I filed.  We have to arbitrate this case.

Does a party waive the right to enforce an arbitration clause by participating in litigation?  The Supreme Court of Texas addressed this issue and set out some very specific factors to consider in Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008).  It is a long majority opinion, partly due to the majority’s attempts to respond to the five other separate opinions with various agreements and dissents -- but it can be distilled into very specific standards.

Perry Homes v. Cull
 
The Perry Homes opinion reiterated that the issue of whether a party can waive arbitration by litigation conduct is a legal issue for the court, rather than an arbitrator. Perry Homes, 258 S.W. 3d at 587. There is a strong presumption against the waiver of arbitration, but it is rebuttable if it is shown that the party seeking arbitration has substantially invoked the judicial process to the point where the opponent would be prejudiced by a switch to arbitration.  This determination is very fact-intensive and depends on a totality of the circumstances. Perry Homes, 258 S.W. 3d at 592.
 
The judicial process is substantially invoked when the party seeking arbitration has taken specific and deliberate actions, after the filing of suit, that are inconsistent with the right to arbitrate, or it has actively tried, but failed, to achieve a satisfactory result through litigation before turning to arbitration. Perry Homes, 258 S.W. 3d at 590, citing In re Vesta Ins. Group, Inc., 192  S.W.3d 759, 769 (Tex. 2006) (per curiam). However, even if the conduct was sufficient to rebut the presumption against waiver, the party opposing arbitration must show it was prejudiced by the actions of the party seeking to invoke it before waiver will be enforced. Perry Homes, 258 S.W. 3d at 595.

The Culls’ Litigation Conduct

Perry Homes involved some rather extreme facts that prompted the Court to find the home buyers who sued their builder and warranty company for defects in construction had waived their right to enforce the arbitration clause in the home purchase agreement. The Court vacated an arbitration award and remanded the case for a prompt trial. Id. at 601. It also set out the factors to consider in a manner that makes them easily applicable to less extreme cases.

When the Culls sued, the home warranty insurance company immediately requested arbitration, pursuant to the policy. Perry Homes, 258 S.W.3d at 585. The Culls vigorously opposed arbitration, in a 79-page response. Id. No one obtained a ruling. Id. The Culls sought extensive discovery over 14 months, taking at least ten depositions and filing five motions to compel. Id. Then, just four days before the trial setting, they moved to compel arbitration. Id. The trial judge chided their about-face, but said he could not deny them arbitration because the defendants had not shown prejudice from the Culls’ litigation conduct, noting that the same litigation activities might or might not have been required by the arbitrator. Id.

After a year in arbitration, the arbitrator awarded the Culls the purchase price of their home, mental anguish damages, exemplary damages, and attorneys’ fees, totaling $800,000. Id. The home warranty company moved to vacate the award, arguing that the case should never have been sent to arbitration after so much activity in court. Id. The trial court overruled the objection and confirmed the award. Id. The Court of Appeals affirmed. Id.

Supreme Court analysis

The Supreme Court first summarized numerous cases in which litigation conduct had been found insufficient to waive an arbitration clause, noting that the following actions, by themselves, were not sufficient:

  • filing suit;

  • moving to dismiss the claim for lack of standing;

  • moving to set aside a default judgment and requesting a new trial;

  • opposing a trial setting and seeking to move the litigation the federal court;

  • moving to strike an intervention and opposing discovery;

  • sending 18 interrogatories and 19 requests for production;

  • requesting an initial round of discovery, noticing (but not taking) a single deposition, and agreeing to a trial resetting; or

  • seeking initial discovery, taking four depositions, and moving for dismissal based on standing.

Perry Homes, 258 S.W. 3d at 590.


The Court stressed that in making the decision of whether the litigation process has been sufficiently invoked to justify denial of arbitration, a court must look at the totality of the circumstances on a case-by-case basis. The Perry Homes decision listed the following factors to consider:

  • whether the movant was the plaintiff (who chose to file in court) or defendant (who merely responded),

  • how long the movant delayed before seeking arbitration,

  • whether the movant knew about the arbitration clause all along,

  • how much pretrial activity related to the merits rather than arbitrability or jurisdiction,

  • how much time and expense had been incurred in litigation,

  • whether the movant sought or opposed arbitration earlier in the case,

  • whether the movant filed affirmative claims or dispositive motions,

  • what discovery would be unavailable in arbitration,

  • whether activity in court would be duplicated in arbitration, or

  • when the case was to be tried.

Perry Homes, 258 S.W. 3d at 591.


The Court found that the Culls’ invocation of the judicial process was more than sufficient to impliedly waive arbitration. Id. at 596.


Next, the court analyzed whether Perry Homes had showed it was prejudiced by being sent to arbitration. Id. at 597. The Court said the question relates to inherent unfairness:  “a party should not be allowed purposefully and unjustifiably to manipulate the exercise of its arbitral rights simply to gain an unfair tactical advantage over the opposing party.” Id., quoting In re Tyco, 422 F.3d 41, 46 n. 5 (1st Cir. 2005). It noted that the Culls initially objected to arbitration, so when the defendants acquiesced in litigation, the Culls got extensive discovery under one set of rules, including limiting their opponents’ right to appellate review of orders to compel; but arbitration discovery would have been under a different set of rules. Id. They also delayed trial by switching to arbitration. Id. The Court found that such manipulation of litigation to a party’s advantage is precisely the kind of inherent unfairness that constitutes prejudice. Id.


After Perry Homes, the Supreme Court applied the stated factors in G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015). The litigation arose from hurricane Dolly’s extensive damage to a luxury condominium project on South Padre Island. G.T. Leach Builders, 458 S.W.3d at 509. The Court found a late-added defendant’s litigation conduct did not impliedly waive its arbitration rights. Id. at 514. Leach had filed counterclaims, defensive motions for relief, and answered the plaintiff’s pretrial discovery. G.T. Leach Builders, 458 S.W.3d at 513. The only discovery it sent was a request for disclosures. Id. The Court noted that Leach only took the actions necessary to preserve its claim once it was sued; it had not sought summary judgment or dismissal of the claims on the merits. Id. The Court found this was not sufficient for an implied waiver. Id. Moreover, the plaintiff had not shown prejudice. G.T. Leach Builders, 458 S.W.3d at 515.

Courts of Appeals’ application of Perry Homes

There are dozens of cases in which the Courts of Appeals have applied the Perry Homes test. Of course, they are all very fact-specific. The cases provide examples of what actions will and will not result in waiver of arbitration:

Cases in which arbitration rights were not waived:

  • In re Hawthorne Townhomes, L.P.,  282 S.W.3d 131, 140 (Tex.App.–Dallas 2009, no pet.) – Defendants did not waive right to enforce arbitration provision by responding to plaintiff’s petition and discovery requests, because they would have faced default judgment or sanctions if they had not done so. Filing a motion to dismiss was also not sufficient invocation of the judicial process to find waiver.

  • Small v. Specialty Contractors, Inc., 310 S.W.3d 639, 642 (Tex.App.–Dallas 2010, no pet.) – Right to enforce arbitration provision was not waived when nine months elapsed between answer and motion to compel, discovery was not completed, there was no trial setting, and opponent did not claim that the discovery already conducted could not be used in arbitration or that he would not be entitled to take additional discovery in arbitration.

  • Ascendant Anesthesia PLLC v. Abazi, 348 S.W.3d 454, 463 (Tex.App.–Dallas 2011, no pet.) – Arbitration movant (employer/plaintiff) had filed a motion for expedited discovery to take a deposition, but then did not take it. It obtained a temporary restraining order for certain documents, but that was by agreement. The court said that was not enough to waive arbitration, noting the plaintiff did not seek action on the merits (such as filing a motion for summary judgment), and there was no trial date.

  • Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168, 182 (Tex.App.–Dallas 2013, no pet.) – Defendant had demanded arbitration a month before plaintiff filed suit, then invoked the arbitration clause in its answer. Even though it waited over a year to file a motion to compel arbitration, it had never filed any motions on the merits and it did not engage in extensive discovery, but only participated in discovery initiated by its co-defendants.

  • Seven Hills Commercial, LLC v. Mirabal Custom Homes, Inc., 442 S.W.3d 706, 721 (Tex. App. – Dallas 2014, pet. denied) –  Defendant did not substantially invoke the judicial process even though it had filed a Craddock motion for relief from a default judgment. Discovery had not been conducted and it filed the motion to compel arbitration only a few weeks after the order granting a new trial.

  • Sipriano v. Regional Finance Corporation of Texas, 2016 WL 2905553 (Tex.App.–Dallas 2016, no pet.) – Defendants in a suit for conduct in collection of a debt had filed a counterclaim to recover the debt, then sought arbitration seven months after suit was filed. The trial court granted the application, the parties arbitrated, and the arbitrator rendered a take-nothing judgment as to all parties. The debtor appealed, asserting waiver by substantial invocation of the judicial process. The Court considered the issue of prejudice first. Plaintiff said her expenses for responding to discovery and attending mediation were “probably” more than she would have incurred in arbitration. In finding no prejudice, the Court noted the lack of evidence that the discovery could not be used in arbitration and no economic hardship for participating in arbitration. The Court also noted there was no showing the defendant obtained access to information in the litigation that it could not obtain in arbitration or that it attempted to obtain discovery under one set of rules and then arbitrate under a different set of rules.  Sipriano, 2016 WL 2905553 at *6.

  • Lakeway Homes, Inc. v. White, 2016 WL 3453559 (Tex.App.–Dallas 2016, no pet.) – The Court again considered the prejudice issue first and found the opponents did not show prejudice. The defendant sought arbitration 16 months after the case was filed, however, the plaintiffs made no attempt to move the litigation forward and agreed to three scheduling orders. The Court said it did not have to address whether the conduct substantially invoked the judicial process, but it also said it did not see any manipulation of the litigation by the movant for its own advantage or anything to the plaintiff’s detriment. “Delay alone generally does not establish waiver.”


Cases in which arbitration was waived by substantial invocation of the litigation process

  • Adams v. StaxxRing, Inc., 344 S.W.3d 641 (Tex.App.–Dallas 2011) – A denial of a motion to compel arbitration was upheld. The party seeking arbitration was a defendant/counterclaimant who had sought expedited discovery, added parties, attached a copy of the contract with the arbitration provision to an affidavit, mediated twice (unsuccessfully), filed a Rule 12 motion and sought mandamus when the ruling went against him, sought temporary injunctions (in hearings lasting several days), obtained an unfavorable ruling containing harsh language against him by the judge, served two extensive requests for production, moved to compel but resisted discovery himself, moved to continue a trial setting, filed a suggestion of bankruptcy (that was dismissed), and filed a same-subject suit in another court using a different entity name. He moved to compel arbitration a year after the lawsuit began. His conduct was sufficient to impliedly waive arbitration. The prejudice to the opponent was having to answer extensive discovery involving over 5,000 pages of documents of production, motions to compel discovery from Adams, and substantial legal fees for responding to Adams’ litigation tactics. The Court said the opponent only has to show the fact of prejudice not proof of its extent. Adams, 344 S.W.3d at 652.

  • Ideal Roofing, Inc. v. Armbruster, 2013 WL 6063724 (Tex.App.–Dallas 2013, no pet.) – The court detailed a procedural history of substantial discovery and contested motions over 19 months and three trial settings. Ideal Roofing, 2013 WL 6063724 at * 3-6. After mediation was unsuccessful, the defendant moved to compel arbitration. The court said the litigation process was substantially invoked when the party had actively tried, but failed, to achieve a satisfactory result through litigation before turning to arbitration. 2013 WL 6063724 at *3. In finding prejudice to the plaintiffs, the Court noted they reside in Dallas and the arbitration agreement provided arbitration was to be conducted in Houston. Id. at 8. The Court also noted the expenses they had already incurred, including two days of mediation and deposition of an expert. Id.

Whether you are proposing or opposing arbitration, you can probably find a case applying the Perry Homes factors to a fact pattern similar to yours.


 

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